Daily ETF Watch: Global X To Do Smart Beta

Global X files for smart-beta ETFs based on Edhec’s Scientific Beta indexes.

Global X has filed for five ETFs tied to indexes created by Edhec Risk Institute’s Asia arm. The underlying “Scientific Beta” indexes take a multifactor approach and also use multiple weighting methodologies.

These will not be the first ETFs in the U.S. to track Edhec’s Scientific Beta indexes, however. Earlier this year, ETF Securities launched the ETFS Diversified-Factor U.S. Large Cap ETF (SBUS) and the ETFS Diversified-Factor Developed Europe ETF (SBEU). Both come with an expense ratio of 0.40 percent, or $40 for each $10,000 invested.

The basic methodologies are very similar for each of the ETFS funds and the Global X funds detailed in the Global X filing. Each fund’s benchmark comprises four different factor indexes targeting high valuation, high momentum, low volatility and size, respectively. Depending on the regional coverage, each benchmark covers a set number of companies, with the subindexes each selecting the top half of that investment universe that best represents its targeted factor.

In the ETFS funds, those factor-based subindexes are each given an equal weighting (25 percent) in the main benchmark, and each uses five different weighting strategies to maximize diversification. The weighting strategies are: maximum de-concentration, maximum de-correlation, efficient minimum volatility, efficient maximum Sharpe ratio and diversified risk weighted. However, the underlying benchmarks of the Global X funds are all "Equal Risk" indexes, meaning that the subindexes for each benchmark are weighted so that they all contribute the same amount of risk relative to a standard cap-weighting methodology, according to the prospectus.

A Comprehensive Fund Family

The five Global X funds outlined in the filing are as follows:

• Global X Scientific Beta US ETF
• Global X Scientific Beta Europe ETF
• Global X Scientific Beta Japan ETF
• Global X Scientific Beta Asia ex-Japan ETF
• Global X Scientific Beta Developed Markets ex-US ETF

The family of funds will target developed markets. The broadest fund, the Developed ex-U.S. ETF, will select stocks from 24 countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, South Korea, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The Global X filing did not include tickers or expense ratios. It also did not mention which exchange the funds would list on. 

Best Indexer Website

Edhec Scientific Beta won the Best Index Provider Website award at this year’s ETF.com awards. Its informative website contains exhaustive information about its indexes and their underlying methodologies. Moreover, the access to returns series, constituent lists, identifiers and other data are all completely free.

That raises interesting issues around investor education and transparency. For example, while many ETF providers go to great lengths to provide investors with extensive data on their funds, the index provider is an independent third party.